LLPs and the Company Directors Disqualification Act – a blurring of the lines?

A certain mystery still surrounds the status of members of a limited liability partnership (LLP). Are they shareholders or directors or a hybrid version of the two?

LLP members are under obligations to act in many ways like a director of a limited liability company, taking collective responsibility for managing the business. And while members have the benefit of part ownership of an LLP (which is not a prerequisite for being a company director), both members and directors enjoy the privilege of limited liability: neither are held personally liable for the debts of the business, save in situations where they have breached duties.

However, with that privilege comes accountability for the actions taken in their respective roles.

Company directors are – or should be – aware that misconduct can lead to disqualification. As was recently highlighted in the English High Court, the same fate awaits the delinquent member of an LLP – even if they have no management role – by virtue of the application of the Company Directors Disqualification Act 1986.

Background

In The Secretary of State for Business, Energy and Industrial Strategy v Geoghegan and others (2021), the First and Second Defendants were both junior members of an LLP which specialised in public relations. In 2017, they were removed as members of the LLP for misconduct in relation to a marketing campaign, the fallout from which led to the LLP's membership of the Public Relations and Communications Association being terminated. The LLP shortly thereafter went into administration, followed by compulsory liquidation.

As a result of the misconduct, in 2021, the Department for Business, Energy & Industrial Strategy (BEIS) issued disqualification proceedings against the First and Second Defendants under section 6 of the Company Directors Disqualification Act. Pursuant to the Act, the court must make a disqualification order against a director where: (1) that person has been a director of a company; (2) the company has become insolvent; and (3) the conduct of the person, as a director of that company, makes them unfit to be concerned in the management of a company. Such conduct includes in relation to any matter connected to or arising out of the insolvency.

Although the First and Second Defendants were not directors, the Act applied to them, as modified for members and LLPs, through regulation 4(2) of the Limited Liability Partnership Regulations 2001. 

The First and Second Defendants applied to strike out the claim against them, or to obtain summary judgment, on the basis of an argument that only those members concerned with the management of the LLP could be considered equivalent to directors and therefore be subject to the provisions of the Act.  The First and Second Defendants argued they were not in a management role and undertook no "conduct as a director" so that the Act could not apply.

The High Court did not agree, dismissing the application and finding that any member of an LLP could be disqualified under the Act: a management role is not a prerequisite. 

Key decisions

Policy

The judge, the Honourable Mr Justice Michael Green, discussed the policy behind the Act and the regulations. He found it is to ensure that members of LLPs, who receive the benefits of limited liability akin to directors of companies, are also held responsible for their actions in their capacity as a member.  The goal is to raise the standards for the protection of creditors.

Capacity

The judge held that any member of an LLP can be subject to disqualification proceedings under the Act as modified by the regulations. Specifically, there is no requirement that the member has to be on the management board or a level equivalent to a director. Accordingly, a member can be disqualified for anything done in their capacity as a member.

Test

Having considered a number of cases in relation to the disqualification of directors, the judge found that, although a company director necessarily has a management role, the particular role and its responsibilities may vary greatly. Further, "for public protection, the net of persons potentially subject to disqualification is drawn widely".

The Act must be construed and applied in the same way to members as it is to directors: whether a member should be disqualified must depend upon their "conduct as a member", in their particular role and responsibilities, without further modification by reference to management roles. The test for unfit conduct is whether such conduct makes them "unfit to be concerned in the management of" an LLP.

The safeguard for a junior member who is not involved in management  is limited to judicial review since, under section 7(1) of the Act, the Secretary of State must conclude that disqualification proceedings are "expedient in the public interest" before they are brought; that is a decision which could be challenged.

Osborne Clarke comment

Although the blanket application of the Act to both members and directors seemingly blurs the lines between the two roles, the practical impact on directors and members is starkly different. The fact that LLP members can be disqualified for misconduct pursuant to the Act regardless of involvement in management of the LLP is, at first blush, a far more draconian penalty for that member than it would be for a director of a limited company who at least, by dint of their role, is involved in management of the company.

It appears more draconian still in light of the consequences of disqualification for a member, which include exclusion from taking a role as a company director or as a charitable trustee. 

Since the conduct of a member that can be relied upon is anything done in the capacity of a member of the LLP, there is no line drawn in the legislation or to be construed as to the relevant conduct that can be relied upon by the Secretary of State. Members must be simultaneously mindful as to what constitutes "unfit conduct" and remember that they are subject to fiduciary duties in a similar vein to company directors (that is, they have a duty to act in good faith and to act in the best interests of the LLP).  Breach of these duties will render their conduct unfit and satisfy the third limb of the disqualification test: they will be deemed unfit to be concerned in the management of an LLP.

The decision is perhaps a hard one: it does not reflect the commercial reality that many LLP members are not involved in management. On the other hand, the policy at the root – the protection of creditors – justifies this stringent approach. Because the test for disqualification links the conduct of the member with the insolvency of the LLP, a strict line may encourage proper conduct, potentially reducing the number of insolvencies and best serving the policy.

The case provides a lesson for all LLP members to ensure they conduct themselves, and their business, appropriately.